Bumi Armada’s (BAB) 2Q19 result was commendable, in line with our expectation. Operational wise, OMS vessels utilization improved, FPSO Olombendo and Kraken continue to operate with high uptime. Kraken’s power generator issue since 2017 was resolved in 2Q19 and resumed its two-train operation, which is a positive. Reaffirm our BUY rating with an unchanged target price of RM0.31.

2nd Consecutive Quarter of Decent Profit

BAB recorded a 2Q19 core net profit of RM64m, bringing 6M19 to RM139m (-23% yoy). The results represent 54% and 57% of our and consensus fullyear estimates, meeting our forecast but above market expectations. The drop in 6M19 revenue was largely due to the halving in OMS contribution following the completion of LukOil project in Caspian Sea.

Olombendo and Kraken Driving Earnings Sequentially

On a qoq basis, 2Q19 revenue was 9% higher driven by a combination of factors: i) FPSO Kraken’s main power generator has been rectified and stable since this quarter, ii) FPSO Olombendo saw longer working days and recognition of minor incentive fee, but the quantum was not disclosed, and iii) higher OMS vessels utilisation at 51% (vs. 39% in 1Q19). This led to FPO revenue increasing by 4% and OMS segment by 39% qoq.

Business Update

The FPSO Kraken is in the midst of rectifying its water filtration unit, which is targeted to be done by next year. BAB currently has 19 working vessels, and in the midst of deploying another 2 of its vessels, currently oversea back to Malaysia to cater for the higher domestic activities. However, vessel rates are still seeing marginal improvement. The 2 vessels in Caspian Sea are still in the midst of bidding for new contracts. Meanwhile, the outcome of FPSO Claire’s court case is expected to be known sometime in 4Q19. This is a potential catalyst if it is successful in claiming for damages (US$280m), which may be used as ammunition in funding the India FPSO 98/2 project.

Maintain BUY

We reiterate our BUY rating with an unchanged TP of RM0.31. We believe risk-reward has turned more favorable with the operation improving, and expect its valuation to rerate. Downside risks include weaker-than-expected OSV fleet utilization, continuous late deployment of subsea vessels and termination of existing FPSO contracts.

Source: Affin Hwang Research - 3 Sept 2019